UPDATE 3-UPS shares fall, dragging transports lower
Wed Jan 12, 2005 06:02 PM ET
(Updates with FedEx economist comments)
By Reshma Kapadia
NEW YORK, Jan 12 (Reuters) - The shares of United Parcel Service Inc. (UPS.N: Quote, Profile, Research) slid more than 7 percent on Wednesday, dragging down the transport sector a day after the company said fourth-quarter earnings would miss estimates.
A more optimistic comment from UPS rival FedEx Corp. (FDX.N: Quote, Profile, Research) helped buffer the weakness in transport stocks, but even trucking shares felt the heat.
"UPS is the bellwether for the industry. I know people are concerned about the macro impact and whether that is the first sign the economy is weakening," said FTN Midwest analyst Mark Davis. "But I think this is more of an anomaly and I don't think it speaks to the economic situation in 2005."
In its profit warning, UPS, the world's largest package delivery company, cited higher-than-expected operating costs due to storms and domestic package volume growth that was about 20 percent below its expectations.
FedEx, the No. 1 air-express shipper, stood by its quarterly forecast late on Tuesday and said it still sees favorable U.S. and global economic conditions.
In an interview late Wednesday, FedEx Chief Economist Gene Huang said its growth was "steady and strong" through the holiday season and into 2005.
"I can assure you growth momentum is steady and I think the situation is aligned with the macroeconomic picture," Huang said, adding that performance during the holiday season exceeded the company's expectations.
The Dow Jones Transport index closed down 1.6 percent after hitting its lowest point since late November.
Some analysts said the UPS warning suggested the company was under pressure from FedEx and possibly from Deutsche Post AG's (DPWGn.DE: Quote, Profile, Research) DHL, which has been trying to push into the U.S. ground-delivery market.
"We don't believe that bad weather and a drop in one week of volume provides a credible explanation for the shortfall," said AG Edwards analyst Donald Broughton in a research note.
"It is our sense that the shortfall is better answered by a continued loss in market share to FedEx, coupled with higher operating costs as a result of a very 'friendly Teamsters" union contract that inhibits UPS's ability to leverage its cost structure no matter how volume fluctuates."
CSFB analyst John Barnes, who cut his rating on UPS to neutral from outperform, said in a research note that he expects the market to reexamine UPS' growth potential "given what appear to be significant challenges in the near term."
He expects the stock is "likely dead money over the next several months."
Morgan Keegan analyst Arthur Hatfield also said consumers bought gifts later in the holiday season this year, leading to increased use of overnight air delivery rather than slower ground service. While UPS noted an increase in its air business, FedEx is the name people often think about when shipping packages overnight by air, he said.
UPS is analyzing the situation to find out what led to the dip in volume, company spokesman Norman Black said. While some businesses were closed in the early part of the week after Christmas, UPS does not know if any one single factor caused the "befuddling development," he said.
Several analysts said they did not think the volume drop was limited to the last week of the year. CSFB's Barnes said total volume growth was moving at 2.5 percent before the last week of the year, a full percentage point lower than his estimate and below management's expectations.
The UPS earnings warnings, coming after an October report that third-quarter earnings fell short of analysts' estimates, "may rattle investor confidence," said Robert W. Baird analyst Jon Langenfeld.
Hatfield said: "I think what you will see is a shift of people moving from UPS to FedEx and reading the competitive issue into (this news)."
UPS shares fell $6.12 to $77.18, hitting levels not seen since October. FedEx shares ended down 94 cents to $94.47. Both companies' shares posted double-digit gains last year as the U.S. economic expansion and a surge in global trade drove profit and volume growth.
Trucking stocks also took a beating, with shares of Overnite Corp. (OVNT.O: Quote, Profile, Research) closing down 2.7 percent at $33.04 Yellow Roadway Corp. (YELL.O: Quote, Profile, Research) shares fell 69 cents to $51.75 and USF Corp. (USFC.O: Quote, Profile, Research) shares slipped 62 cents to $34.84.
